How to Manage Your Money

Create a Budget

A budget is a spending plan for your money that ensures you'll have enough for the things you need and that are most important to you. To create a budget, follow these steps.

Take Inventory of Your Finances

By taking an inventory of your finances, you can get a clear picture of what you own, what you owe and how you're spending your money. To begin, write down your assets, which may include your house, investments, cars and savings account balances.

Then, jot down your debts, which might include student loans, car loans, personal loans, credit card balances and more. Next, keep track of every purchase you make for the next few months.

Your financial inventory may reveal that your grocery or restaurant spending is out of control or that you are spending more than you make or have more debt than you thought you had. It will give you an idea of how you're doing financially and where you need to improve.

2. Choose a Budget Plan

The budget plan you choose will depend on your strengths and weaknesses when it comes to money and your unique financial goals. Here are a few options to consider:

• The envelope system: If you wish to stop careless spending or stay out of debt, the envelope system may be a good choice. Set a monthly spending limit for each expense category, such as gas, groceries and entertainment, and fill an envelope with only the amount of cash you want to spend for that category. Once the envelope is empty, don't allow yourself to spend more money on that particular category for the rest of the month.
• Pay yourself first: The pay yourself first budget may be right for you if you have difficulty saving money. You decide how much you'd like to set aside for your emergency fund, retirement fund and other savings accounts, and then use the rest on your monthly expenses and discretionary spending.
• Zero-based budget: You may benefit from the zero-based budget if you'd like a strict plan for your money. With the zero-based budget, you take your income and allocate every dollar in some way until there are zero dollars left. By budgeting your essential and discretionary money down to the penny—including everything from rent and utilities to savings to eating out—you can make sure your money goes exactly where you want it to every month.

3. Review Your Budget Monthly

At the end of every month, sit down and review your budget to make sure you're staying on track. Compare your actual expenses to what you created in your budget to figure out where you did well and where you need to improve.

During your monthly budget review, you may find you need to tweak your budget as a result of a change in your income, expenses, goals or all of the above. This is fine, as your budget is bound to change as you go through different stages of your life.

Manage Your Debt

Managing your debt is an important part of financial management. These tips can help you take control of your debt and become debt-free faster.

Check Your Credit Report

By checking your credit report, you can figure out which creditors you owe money to and get an idea of your creditworthiness or how a creditor may view you as a borrower. If you're unhappy with your credit, rest assured you don't have to live with it forever. By taking steps to improve your credit, such as always paying your bills on time and reducing how much credit you're using, you can improve it.

List Everything You Owe

Create a comprehensive list of all of your debts. Write down all of your creditors, as well as how much you owe them and when your payments are due. By clearly listing everything you owe, you can reduce your risk of missing payments and develop an effective debt repayment strategy.

Choose How You Want to Tackle Your Debt

There are a variety of ways you can pay off your debt. Three of the most popular debt repayment strategies on revolving debts such as credit cards include the debt snowball, debt avalanche and debt consolidation approaches.

• Debt snowball approach: The debt snowball strategy involves putting as much money as you can toward your debt with the lowest balance first while making the minimum payments on your other balances. As soon as you repay the first debt, you'll take the amount of money you were applying toward it and add it to the minimum payment you were making on your second-lowest debt.

  Because this payment on your second-lowest debt is a combination of what you paid toward the first loan and the minimum payment you were already paying on the second, you're "snowballing" your payments. You'll continue to pay your accounts off this way and knock out each debt until you're debt-free.

• Debt avalanche approach: With the debt avalanche strategy, you list your debts in order from the one with the highest interest rate to the one with the lowest interest rate while ignoring the balances. Then you focus on repaying the debts with the highest interest rates first and eventually make your way to the lower interest debts. Using this strategy can help you save a significant amount of money on interest.
• Debt consolidation approach: Debt consolidation is the process of rolling your high interest debts like credit card bills into a single payment with a lower interest rate. If you're overwhelmed with all of your debts, this strategy can reduce the total debt you owe while allowing you to organize it in one account so it's easier to track.

Develop Good Credit Habits

Good credit can help you achieve milestones like buying your first home or car. It can also lead to lower interest rates and more favorable terms that can save you thousands or even hundreds of thousands over your life. To develop good credit, be sure to do the following:

• Monitor your credit. Your credit report contains information about your credit history and is evaluated by lenders when you apply for loans. By monitoring your credit, you can detect and dispute errors and inaccuracies and get an idea of where you stand financially. If you find that you don't have the best credit, you may want to focus on rebuilding it before you do things like take out a mortgage or apply for a personal loan.
• Use credit cards wisely. By being responsible with credit cards, you can stay out of debt, rebuild your credit and even redeem some rewards. Paying your balances on time and in full, keeping your balances low, and only swiping for large purchases when you have the cash to pay them off can keep you out of credit card trouble.
• Apply for credit only when you need it. Every time you apply for credit, a hard inquiry will appear on your credit report and can lower your credit score. To keep your credit score in good shape, apply for credit only when you need it. Multiple credit inquiries in a short time frame may signify you're living above your means or struggling financially.

Start Saving

Saving money can help you meet your short- and long-term financial goals. Whether you'd like to retire by a certain age, buy your first house or fund your child's college, saving is essential. Here are money-saving tips that can help you out:

• Create an emergency fund. Emergencies happen when we least expect them, making an emergency fund crucial. With an emergency fund, you can pay for unexpected expenses such as car repairs and medical bills without getting into debt. Start by saving $1,000 in your emergency fund and eventually save enough to cover three to six months' worth of expenses.
• Save for retirement. The sooner you start saving for retirement, the more time your money will have to grow. To save for retirement, take advantage of your employer's tax-advantaged retirement plan such as a 401(k). If you don't have access to an employer plan, you can still save money for retirement with a traditional IRA or Roth IRA.
• Cut expenses. By cutting your expenses, you'll have more cash on hand to save. Take a look at what you currently spend money on and see where you can save. You can move to a smaller house, get rid of cable, buy generic instead of brand-name items at the grocery store, and cook more, just to name a few ways to cut back.

Try Investing

Once you're debt-free and have an emergency fund in place, it's a good idea to start investing. Investing can help you build wealth, retire, save on taxes and meet other financial goals like paying for your child's college. You can invest in individual stocks, bonds, mutual funds, retirement accounts and more.

If you're new to investing, consider a mutual fund, as it will allow you to invest money across a variety of securities without having to do your own intense research. Better yet, consider consulting a financial advisor or "robo-adviser" (online advising that is mostly automated) to guide you in the right direction.

Managing for the Future

The way you manage your money impacts where you live, how you spend your time and what your future holds. By managing money efficiently—and starting sooner rather than later—you can meet your financial goals and have a better chance of living the life you want.